Friday, February 1, 2013

January 2013 Stock Market Performance

Dow Index Monthly Closes Through January, 2013

On the Cusp!

After a relatively flat fourth quarter (actually, it was slightly negative), the market exploded into the new year. The year started with a 308 point relief rally on January 2nd, celebrating the last-minute agreement that kept us from falling off the "fiscal cliff" -- at least for a while. From there, The Dow kept going until it established a new 5-year high close of 13954 on January 29th, right on the cusp of 14,000!

News that the economy had actually contracted during the fourth quarter triggered a decline at the end of the month. Still, the DJIA (Dow Jones Industrial Average) closed January at 13,860.58, up over 5% for the month. January's performance was the best January in almost 20 years -- since 1994. (See chart above. Click to expand.)

Note: At the end of the crash, the Dow had lost about 54% of its value (from the all-time high). For an explanation of how it can be up over 100% since then and still be below the all-time high, see The Importance of Avoiding Large Losses.

The Next 10 Years

My model for projecting 10-year stock market returns is currently projecting 10-year returns below 5%. Since my model is earnings based, this is a preliminary number. I'll have to wait for 2012 earnings data before finalizing the projection. I'll post interim updates monthly, and the "official" update after the end of the first quarter.

Interest Rates

U.S. Treasury constant maturity interest rates increased significantly during the month. Five year treasury yields went from 0.72% at the end of last month to 0.88% this month; ten year yields increased from 1.78% to 2.02%. My interest rate forecasting model continues to forecast increasing rates over the next five years. That model forecasts 1-year rates rising from the current 0.15% to 2.4% (up from 2.1% last month), and 5-year rates rising from 0.88% to 3.2% (up from 2.9% last month).